Business Guides

What’s the Difference Between Conventional and SBA Loans?

Last updated on October 14, 2020

Jacques Famy Jr

Businesses looking for funding opportunities have a wide range of financing options to choose from. Whether you’re looking for something conventional, from an online lender, or an SBA loan — you’ll have to weigh the pros and cons of each to determine which is best suited for your business needs.

The primary difference between a “conventional loan” and an SBA loan is that an SBA loan is guaranteed by the government. They are both viable options for businesses looking to find reliable funding.

The Small Business Administration (SBA) offers a wide range of financing opportunities that can help springboard businesses or keep the ball rolling for future growth.

A Brief Look at Both Loan Types

We can see some differences when we take a quick glance at conventional loans vs. SBA loans. Let’s explore how they work, along with how their rates and terms differ.

SBA Loan

  • Loan Amount: $5,000 – $5,000,000
  • Loan Term: 5-25 years
  • Interest Rates: 3.63% – 13%

Conventional Loan

  • Loan Amount: $25,000 – $250,000
  • Loan Terms: 1-5 years
  • Interest Rate: 7% – 30%

We can already see some stark differences by just looking at these three factors, but there’s so much more to consider when identifying which option works best for your business needs.

SBA Loans 101

The Small Business Administration, also known as the SBA, is a government agency that gives entrepreneurs and small business owners resources and funding options.

Contrary to what you may think, the SBA does not lend money but rather acts as a guarantor of certain financing institutions and banks. They guarantee a certain percentage of a loan to help mitigate risk and offer incentives to banks to help out small business owners. This means longer payment terms, lower payments, and better interest rates compared to conventional loans.

The SBA implements a diverse range of loan programs.

  • SBA 7(a) Loan Program is the most popular funding option from the Small Business Administration. It can be used for a wide array of general business needs, making it a flexible and trendy option for small business owners.
  • SBA Microloan Program offers smaller amounts (up to $50,000), as the SBA acts as a nonprofit third-party intermediary lender.
  • CDC/504 Loan Program provides long-term financing at a fixed interest rate for expansion or modernization. This is a fantastic funding option for established businesses.

These are the three most popular SBA loan programs, but they’re not the only ones. You can also look into

  • SBA Veterans Advantage
  • SBA CapLines
  • SBA Community Advantage
  • SBA Export Working Capital Program
  • SBA Paycheck Protection Program
  • SBA Economic Injury Disaster Loan (EIDL)

Some loans are better suited for large purchases like equipment or property, while others may be better for day-to-day operational needs or working capital. You may have to do some research to determine which works best for your business needs.

Some SBA programs heavily favor women-owned or minority-owned businesses, helping these entrepreneurs get the funding opportunities they need.

Regardless, SBA loans are a great way to obtain working capital, real estate, manufacturing equipment, or even acquire another business.

Qualifications

Due to the attractive terms, payment options, and interest rates — SBA loans are not easy to qualify for. Those struggling with business credit scores, revenue, or time in business may have a difficult time getting approved for SBA loans.

These programs require time and energy to apply for, as there’s substantial paperwork and waiting periods to obtain funding. So, if you’re looking for quick cash flow solutions, SBA loans may not be the avenue for you. However, if you’re worried about getting denied for an SBA program, we have some tips in our How to Handle SBA Loan Denial. So, take a look and follow the steps so that you can get your business on track to receiving excellent financing opportunities.

As mentioned, significant paperwork is required to qualify for an SBA loan, this includes:

  • A valid driver’s license
  • Voided business check
  • Bank statements
  • Balance sheet
  • Profit and loss statements
  • Business tax returns
  • Personal tax returns
  • Business plan
  • Business debt schedule

SBA Rates: $5,000 – $5,000,000

Interest Rates: As low as 3.63% (depending on the loan product)

SBA Terms: Five years to 25 years

A Quick Glance at Conventional Loans

Alright, we’ve looked at how SBA loans work, but what about conventional loans? Well, these traditionally come in the form of business term loans. When most entrepreneurs think of business loan options, term loans are usually top of mind. That’s because the terms are straightforward.

  1. You borrow a fixed amount of money.
  2. You repay the loan over a fixed term.
  3. The payback is at a fixed interest rate.

Simple, right? Predictable monthly payments and fixed interest rates remove a lot of the complexities of financing, which is why this is such an attractive option for so many business owners. Additionally, you can use these funds for a wide range of business needs.

For businesses looking to add to their credit scores, conventional term loans are a great way to get the job done. Make your payments on time, and you’ll help improve your credit score. This opens up more doors to other funding options with more attractive terms or interest rates.

Some popular forms of conventional term loans include:

  • Traditional bank term loans
  • Long term business loans
  • Short term business loans
  • Business acquisition term loans

One issue you may run into is prepayment penalties. Make sure to read the fine print and see if there’s a clause that contains a prepayment penalty, as making early payments can end up costing you. This is certainly a frustrating part of some conventional loan options — but it can be mitigated by doing some digging before signing the fine print.

Qualifications

Some traditional loan options may be secured, meaning they’ll require collateral. This may all depend on your current credit and revenue situation, but it’s worth asking about when looking at conventional financing programs.

Applying for a conventional loan product can also be a fairly lengthy process, with again, substantial paperwork to submit. So, if you’re looking for quick cash flow, you may need to look at alternative financing options. Here’s what you’ll need for your application:

  • Valid driver’s license
  • Voided business check
  • Bank statements
  • Balance sheet
  • Profit and loss statements
  • Credit score
  • Business tax returns
  • Personal tax returns

Conventional Loan Rates: $25,000 – $500,000

Interest Rates: Anywhere between 7% – 30%

Conventional Terms: Between one year and five years

A Quick Review of Conventional Loans vs. SBA Loans

So, there you have it, a breakdown of how traditional loan avenues differ from SBA loans. As we said, they each have their own pros and cons, so it’s up to you to determine which is the right fit for your business’s needs.

SBA loans shine with higher loan amounts, lower interest rates, longer repayment terms, and minimal collateral compared to conventional options. There are also tons of options to choose from, each with their own list of benefits that could be right for your company.

Where conventional loans take the cake is with an easier application process. For many business owners, SBA loan programs are grueling and require too much time and energy for what it’s worth.

However, it’s up to you to decide what’s best for your business, and how a certain financing opportunity can put you in a position to succeed over time.

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* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.